Johnson Controls To Power Through Its Fourth Quarter

by Trefis Team
Johnson Controls
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Johnson Controls (NYSE: JCI) is set to report its fourth quarter (ended September 2017) earnings on November 9. The company is expected to report earnings of 87 cents per share on revenues of $8.09 billion. As per the guidance provided by the company, sales of $8.1 to $8.2 billion and an EPS in the range $0.86 and $0.88 is anticipated. Margins are also expected to improve in the quarter as a result of savings, as well as the pickup in volumes seen in the second half of the financial year, enabling better leverage. In the third quarter, while the company was able to meet consensus estimates on earnings, the stock price fell in the aftermath, as a result of the sales miss as well as the updated full-year guidance provided.

We have a $49 price estimate for Johnson Controls, which is about 16% higher than the current market price.

Savings To Boost Earnings

  • Johnson Controls was able to deliver significant progress on the Buildings organizational structure, post the merger with Tyco, delivering savings of approximately $80 million, or about $0.07 per share, in the third quarter.
  • The company is on track to achieve the higher end of its savings target range of between $250 and $300 million in the year, a range provided by the company back in December, totaling roughly $0.27 per share.
  • The company has attained benefits to the tune of $0.18 through the first nine months of its financial year and expects further savings of $0.09 per share in the fourth quarter.

Reduced Earnings Guidance

  • In the third quarter, JCI trimmed the upper end of the range for its forecast for full-year earnings per share, from $2.60 to $2.68 stated in April to $2.60 to $2.62.
  • This is despite the fact that the FX headwinds expected are far lower than what was predicted in April – of $160 million versus $380 million.
  • This was caused by a slowdown in the organic growth, which is now expected to increase by 2%, instead of 3%.
  • Such a state of affairs is caused by the integration of the two companies. The company will continue to offset the revenue shortfall by its productivity gains, which remain on track.

AGM Batteries To Power The Future

  • The Power Solutions segment has managed to grow substantially in recent years, driven by a demand for their AGM (Absorbent Glass Mat) batteries, which are used in vehicles with the start-stop technology.
  • The company expects the batteries with the start-stop technology to increase from 24% today to over 60% in 2020.
  • A number of factors work in the favor for this technology. As stated by Lisa Bahash, group vice president and general manager Original Equipment of Johnson Controls, strong growth is expected from this technology as it requires minimal changes to the vehicles, and costs considerably less than battery systems in hybrid or electric cars. It is also the best solution to aid automotive manufacturers to meet environmental regulations.
  • These AGM batteries are also able to handle the higher usage that comes along with the new technical features being added to cars. The electrical vehicle boom, and the opportunities provided by the Chinese market, make this business poised for substantial growth in the future. According to Ray Shemanski, a vice president of Johnson Controls, about 40% of new vehicles in China will be fitted with the ‘start-stop’ technology by 2020, the same year when the Chinese government requires automakers to further lower the average fuel consumption, from the current 6.9 liters per 100 kilometers to 5 liters per 100 km.
  • AGM batteries witnessed 17% growth in the third quarter. However, this rate could have been even higher if the capacity had been available to the company.
  • Keeping this capacity constraint in mind, JCI has undertaken significant investment to boost the production of these batteries. The company has guided for $1.25 billion to $1.30 billion in capital expenditure this financial year.
  • Recently, Johnson Controls has stated that it can now address nearly 90 percent of the cars in the U.S. that would require a replacement AGM battery, including high-electrical-load vehicles and stop-start vehicles, which are expected to grow globally by 60 percent by 2025, as mentioned earlier. In anticipation of this growth, Johnson Controls will invest more than $780M globally between 2015 and 2020 in AGM technology in order to increase capacity.

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